Why UltraViolet Produced More Questions Than Answers At CES

The UltraViolet initiative left the Consumer Electronics Show in Las Vegas last week with an important new retail channel in Amazon (NSDQ: AMZN), a new marketing partnership to launch an upcoming ad blitz, and some splashy new hardware announcements from big consumer electronics brands including Samsung.

But is Hollywood’s new movie cloud really ready for prime time? Can any initiative like this thrive without Apple (NSDQ: AAPL) and Disney? (NYSE: DIS) And even more important, what happens if they don’t get it right?

At CES, UltraViolet’s backers – which include Warner Bros. (NYSE: TWX), Sony (NYSE: SNE), Universal and Paramount (NYSE: VIA), as well as major consumer electronics and retail brands – pushed aside complaints by early adopters that the system’s authentication process is too cumbersome.

The new format’s backers said that since new Blu-ray releases supporting UltraViolet began to roll off replication lines late last year, roughly 750,000 consumers have signed up for the program, which puts a DRM-steeped digital version of the movie they just bought on physical disc in the cloud and available for viewing on other devices.

For studios like Sony, which five years ago helped spearhead the formation of the 70-plus member group that created UltraViolet, the Digital Entertainment Content Ecosystem (DECE), the initiative is crucial.

“We are talking about true DRM interoperability for the first time,” said Mitch Singer, chief technology officer for DECE member studio Sony, speaking at the alliance’s CES press event. “Consumers don’t have to worry about or make technology decisions before buying content. You’ll buy a device, you’ll download an app, it’ll be associated and branded UltraViolet, and you know your content will play.

Driven by consumers’ cooling DVD purchasing habits, the home entertainment sector has declined for the last seven years, dropping 2 percent in 2011, according to the Digital Entertainment Group, a single-digit benchmark that was actually considered strong relative to recent yearly craterings.

Theatrical distribution — the other big-ticket studio revenue stream — has also seen better days, declining for the second straight year, with the domestic box office finishing 2011 with about $10.17 billion — off from $10.56 billion in 2010. Perhaps worse, movie attendance was the lowest it’s been since 1992. (Although, the lower-margin foreign exhibition market remains quite strong.)

The studios believe UltraViolet will help re-establish a higher margin urge to purchase movies on behalf of consumers, who have been more apt recently to engage in lower-margin activities, like stream films and TV shows on Netflix (NSDQ: NFLX) or rent DVDs for a $1.20 a night from a Redbox kiosk.

Coupled with restraints on rental outlets — like Warner’s 56-day delay on providing new titles to Netflix — the studios believe UltraViolet won’t just kick-start the nascent business of electronic sell-through, but good old-fashioned disc-buying, too.

In a nutshell, UltraViolet works like this: Buy an Ultraviolet-signatory DVD, Blu-ray or EST title, and a digital version of the film lives in the cloud ready for you to access and play on up to 12 different devices. The system is designed with families in mind — up to six members of a clan can access an UltraViolet account, even if they don’t live in the primary domicile.

There are plenty of perks planned. At CES, for example, Samsung introduced a new Blu-ray player capable of uploading the user’s entire existing disc collection to the cloud for a nominal fee. Further, take the family to a hotel outfitted by DECE member LodgeNet, a provider of media and connectivity solutions to the hospitality industry, and you can access your movie collection from your room.

There are big benefits for the studios, too. They believe this buy-once, play-anywhere scheme will free consumers to once again build movie libraries, since they will now have more options in an electronics universe increasingly devoid of optical drives.

And Hollywood is anxious to get started — about 19 UltraViolet titles have been released since the fourth quarter, including Warner’s Green Lantern and Horrible Bosses, Sony’s The Smurfs and Universal’s Cowboys and Aliens.

Perhaps most notably, the UltraViolet label has appeared on the disc jackets of Warner’s Harry Potter and the Deathly Hallows — Part 2, which was the most popular film of 2011, grossing well over $1 billion worldwide.

And a promotional blitz is set to begin in the coming months, with DECE also announcing at CES a promotional partnership with another studio-backed consortium, the Digital Entertainment Group (DEG), the organization that helped get Blu-ray off the ground — albeit, quite slowly — six years ago.

That speed to get into the market was second-guessed at CES this week, with accounts of early adopters frustrated by UlraViolet’s extensive digital rights management, which requires users to register at two different websites.

Singer boiled down these troubles as “unfinished carpentry” on a “great house,” but others were vexed by their inability to get their UltraViolet movies to play on mobile devices made by Apple, which notably hasn’t yet signed on to DECE.

The failure so far to gain a foothold into Apple’s closed technology universe has been a major detraction from UltraViolet, as has the non-participation of Disney, which has its own DRM locker project in the works, Keychest. DECE continues to talk to both parties about joining its coalition.

But at CES, it became apparent that even some of the studios that are on board with DECE aren’t necessarily all in yet, with Fox (NSDQ: NWS) revealing its decision to hold off on releasing UltraViolet movies until there are more retail outlets to sell them and more devices that play them.

In terms of the former, the announcement last week by Amazon that it will begin selling Warner’s UltraViolet offerings was a key step for an initiative that needed more retail backing.

Concurrently, however, DECE revealed that Netflix had quietly let its DECE membership lapse. It wasn’t a surprise to many to see Netflix pull out of UltraViolet, given Netflix CEO’s Reed Hastings’ historical reluctance to get into the movie-selling business. At one point, Netflix’s player app was seen as a nice work-around for playing UltraViolet movies on the iPad and iPhone. Movie social network site Flixster, which was acquired by Warner last year, now has the only app for playing UltraViolet movies on both PC and Apple platforms.

For his part, Singer downplayed all of these concerns, noting that UltraViolet is still in its “very, very early” stages of development. “You could almost consider this a beta launch,” he added.